Jan. 21 (Bloomberg) -- Christopher Cox stepped down as U.S.
Securities and Exchange Commission chairman, leaving behind a
demoralized agency that failed to spot Bernard Madoff's alleged
fraud and had its role diminished by the collapse of Bear
Stearns Cos. and Lehman Brothers Holdings Inc.

His resignation took effect yesterday, agency spokesman John Nester said. During Cox's 3 1/2-year tenure, the SEC has
been criticized by lawmakers, investors and its own inspector
general as lacking aggressiveness and being deferential to Wall
Street banks. President Barack Obama, a Democrat, picked Mary
Schapiro, the head of the U.S. brokerage industry's self-
regulator, to succeed the Republican Cox.

"I respect Chris Cox, but there's no question that the
commission has been much too passive in area after area under
his leadership," said Harvey Goldschmid, a former Democratic
SEC commissioner who remains in contact with agency employees.
"The morale problems and the lack of public regard for the
agency must be immediately addressed by Mary Schapiro," said Goldschmid, a law professor at Columbia University in New York.

The agency lost clout in March when the Federal Reserve
rescued Bear Stearns and began lending to and examining
investment banks regulated by the SEC. Its domain shrank further
in September after Lehman declared bankruptcy, Merrill Lynch &
Co. sold itself to Bank of America Corp., and Goldman Sachs
Group Inc. and Morgan Stanley became Fed-regulated commercial
banks.

Lawmakers' Criticism

Another blow came in December when Cox, 56, admitted the
SEC missed Madoff's alleged $50 billion Ponzi scheme even though
it had received "credible and specific" complaints about the
New York-based money manager for at least a decade.

That revelation prompted criticism from Democrats and
Republicans at a Jan. 5 meeting of the House Financial Services
Committee. Representative Ron Paul, a Texas Republican,
questioned whether the SEC should be eliminated altogether.

"He may go down as the unluckiest of the SEC chairmen,"
said Robert Hillman, who teaches securities law at the
University of California, Davis. "He was slow to recognize the deteriorating position of brokerage firms. In that sense, he bears joint responsibility with the secretary of the Treasury and the Federal Reserve chairman."

Republican Kathleen Casey, the most senior member of the
commission that oversees the agency, is in line to serve as
acting chairman until the Senate confirms Cox's successor,
Nester said. Obama could instead ask one of the SEC's two
Democratic commissioners, Elisse Walter or Luis Aguilar, to fill
the seat temporarily, Nester said.

Donaldson's Legacy

Cox replaced William Donaldson as SEC chairman in August
2005 after representing California's Orange County in the U.S.
House of Representatives for 17 years.

Donaldson, a former chairman of the New York Stock
Exchange, stepped down after he frustrated fellow Republican
commissioners by subjecting companies to multimillion-dollar
fines and trying to impose new regulations on mutual funds and
hedge funds. He also angered business groups, which complained
to President George W. Bush's administration after Donaldson
tried to give shareholders more power to pick corporate
directors.

Under Cox, who was offered the SEC job by Vice President Dick Cheney, public fights among Democratic and Republican
commissioners stopped and enforcement penalties declined.

Unanimous Approvals

SEC commissioners approved unanimously every rule that came
before them during Cox's first 22 months as chairman. In fiscal
2008, the agency extracted about $1 billion of fines and illegal
profits from companies and individuals after garnering $1.6
billion in 2007. Penalties exceeded $3 billion in each of the
three years preceding 2007.

Cox's focus on calming the waters stoked concerns that the
SEC had become inactive just as Wall Street's biggest companies
were increasing trading in derivatives and complex securities
backed by mortgages, Hillman said.

"If you wait until you get consensus, sometimes nothing
ever happens," he said. "Especially in a period of financial distress, consensus may not be the best operating procedure."

Cox urged a technology overhaul at the SEC aimed at making
corporate profit and revenue statements more useful to
investors. He also tried to cut compliance costs stemming from
the Sarbanes-Oxley Act after the U.S. Chamber of Commerce, the
nation's biggest business lobbying group, said the law's
accounting requirements were prompting companies to list shares
overseas.

'21st Century' Focus

Cox "came to the commission wanting to focus on bringing
the SEC into the 21st century, making the U.S. more globally
competitive by getting rid of burdensome regulations and making
the agency more technologically sophisticated," said Donald
Langevoort, a former SEC attorney who teaches securities
regulation at Georgetown University in Washington. "Like so many of his predecessors, that agenda ran up against unprecedented cataclysmic events."

Global stock markets began swooning in August 2007 after
banks saddled with illiquid subprime-mortgage securities stopped
lending to each other. A year later, with financial companies
still facing asset writedowns, Cox banned short-selling of U.S.
banks, insurers and securities firms.

A short sale takes place when an investor borrows stock and
sells it, aiming to profit by repaying the loan with shares
bought at a lower price. The SEC imposed its prohibition after
public lobbying by Morgan Stanley Chief Executive Officer John
Mack and New York Senators Charles Schumer and Hillary Clinton,
Obama's pick to head the U.S. State Department.

Hedge Funds

The Sept. 19 SEC action drew fire from hedge funds, which
accused the agency of protecting companies whose shares had
plunged because of poor business decisions and over-
concentration in mortgage bonds.

Cox, in a Washington Post interview published Dec. 24, said
the ban was the biggest mistake of his tenure. He told the Post
he made the decision under pressure from Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke. The prohibition
lapsed Oct. 8.

Cox also deflected criticism over the SEC's failure in the
Madoff investigation. In a Dec. 16 statement issued by the
agency, Cox said he was "deeply troubled" that his enforcement
staff never sought subpoena power to probe Madoff or brought
tips about alleged wrongdoing to the attention of commissioners.

'Shifting Blame'

"It was viewed this time as him shifting blame," said Marc Steinberg, a former SEC enforcement attorney who now
teaches law at Southern Methodist University in Dallas. "The staff has some responsibility, but the culture came from the top."

Congress created the SEC in 1934 to restore investor
confidence and stem Wall Street abuses blamed for causing the
Great Depression. The agency's weakened state means Schapiro,
CEO of the Financial Industry Regulatory Authority, will have to
fight to make sure the SEC's 75th anniversary isn't its last,
said Lynn Turner, a former SEC chief accountant.

"The SEC is in worse shape today than the French army was
after its defeat at Waterloo," he said. "Congress may look to some other agency to regulate, which would be to the detriment of investors."